This article was downloaded by: [University of California Santa Cruz]On: 15 October 2014, At: 14:38Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registeredoffice: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK

International Journal of the Economicsof BusinessPublication details, including instructions for authors andsubscription information:http://www.tandfonline.com/loi/cijb20

Understanding denominationalstructures: churches as franchiseorganizationsCharles Zech aa Economics Department, Villanova University, 800 Lancaster Ave,Villanova PA 19086, USA; e‐mail: charles.zech@villanova.eduPublished online: 04 Jun 2010.

To cite this article: Charles Zech (2003) Understanding denominational structures: churches asfranchise organizations, International Journal of the Economics of Business, 10:3, 323-335, DOI:10.1080/1357151032000126265

To link to this article: http://dx.doi.org/10.1080/1357151032000126265

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of all the information (the“Content”) contained in the publications on our platform. However, Taylor & Francis,our agents, and our licensors make no representations or warranties whatsoever as tothe accuracy, completeness, or suitability for any purpose of the Content. Any opinionsand views expressed in this publication are the opinions and views of the authors,and are not the views of or endorsed by Taylor & Francis. The accuracy of the Contentshould not be relied upon and should be independently verified with primary sourcesof information. Taylor and Francis shall not be liable for any losses, actions, claims,proceedings, demands, costs, expenses, damages, and other liabilities whatsoever orhowsoever caused arising directly or indirectly in connection with, in relation to or arisingout of the use of the Content.

This article may be used for research, teaching, and private study purposes. Anysubstantial or systematic reproduction, redistribution, reselling, loan, sub-licensing,systematic supply, or distribution in any form to anyone is expressly forbidden. Terms &Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditions

International Journal of the Economics of BusinessISSN 1357-1516 print/ISSN 1466-1829 online

© 2003 International Journal of the Economics of Businesshttp://www.tandf.co.uk/journals

DOI: 10.1080/1357151032000126265

Int. J. of the Economics of Business,Vol. 10, No. 3, November, 2003, pp. 323–335

The author is grateful to two anonymous referees and the North American Editor of this journal forcomments which have substantially improved this manuscript. Any remaining errors are those of theauthor.Charles Zech, Economics Department, Villanova University, 800 Lancaster Ave, Villanova PA 19086, USA;e-mail: charles.zech@villanova.edu

Understanding Denominational Structures:Churches as Franchise Organizations

CHARLES ZECH

ABSTRACT One of the most complex, yet least-analyzed, organizational relationships isthat between a religious denomination and its member congregations. This study maintainsthat denominational-congregational relationships in US Christian churches can beinformed by the franchise model of organizations. It is argued that it is possible to envisiona continuum of church organizational structures, ranging from a branch office, throughvarious forms of franchise arrangements (including company owned, business format, andtrademark franchises) to freestanding entrepreneurial units. By studying those situationswhere the franchise model explains denominational behavior, and contrasting them withthose situations where the franchise model is not a good fit, we can learn more aboutdenominational structures.

Key words: Franchise; Church; Agency.

JEL classifications: L1, L2, L3.

1. Introduction

The denominational structures of Christian Churches in the United States havelong-mirrored the organizational structures that exist in the corporate world andintentionally so. Just as one can observe a variety of corporate structures, the samediversity exists with denominational structures. This is an application of PaulDiMaggio and Walter Powell’s (1983) theory of institutional isomorphism.Presumably, each organization (business or church) selects the organizationalstructure that best suits its needs.

One corporate structure that has emerged in the last half-century is the franchisemodel. Just as the franchise model is not appropriate for all corporations, it is also

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014

324 C. Zech

not suitable for all denominations. For example, some denominational structuresmight be better modeled by the corporate vertical integration model, whereas othersare better represented by the small business entrepreneurship model. But, bystudying those situations where the franchise model explains denominationalbehavior, and contrasting them with those situations where the franchise model isnot a good fit, we can learn more about denominational structures and theappropriate policies that would emerge.

It should be noted that there have been other attempts in the literature to modelchurches as franchises. Dolin, et al. (1989), in an unpublished paper, were amongthe first to argue that the franchise model is appropriate for analyzing religiousorganizational structures. They applied the model to analyze the operations of thepresent day Roman Catholic Church. Davidson (1995), extending the work ofEkelund, et al. (1989) argued that in its relationship with some monasteries of theday, the Medieval Roman Catholic Church behaved as a franchise. Neither of thesepapers used the franchise model to examine denominational structures beyond theCatholic Church.

In the sections that follow, the franchise model will be summarized and appliedto religious organizations. Some religious organization issues will be analyzed toidentify those situations where the model works and those where it fails.

2. The Franchise Approach

There are essentially two types of franchises. A product (or trademark) franchise ismerely a contractual agreement between two independent firms in which thefranchisee pays the franchisor for the right to sell the franchisor’s product or usetheir trademark at a given place and for a certain period of time, with little controlexerted by the franchisor over the franchisee. An example would be a gas station. Abusiness format franchise, on the other hand, envelops not just the product ortrademark, but the entire business format itself. This includes developing themarketing strategy, providing operating manuals, and maintaining quality control.An example would be a fast food chain. But it is important to note that there are nosharply drawn lines. Rather, one can imagine a continuum of contractualarrangements incorporating dimensions of control, exclusivity, and standardization,ranging from total vertical integration (branch offices) to company-owned outlets,business format franchises, trademark franchises, and stand-alone entrepreneurialoperations. The most interesting case is the non-company owned business formatfranchise. Unless otherwise specified, the term ‘franchise’ in the followingdiscussion refers to that organizational structure.

Franchisees clearly differ from branch offices. Under a branch office organiza-tional structure, all revenues are returned to the central organization, and all billsare paid by the central organization. Franchisees, on the other hand, are ultimatelyresponsible for their own financial conditions.

While early on the popularity of franchising was attributed to its ability to raisecapital, more recently, scholars have emphasized the franchise form of organization asan efficient response to the agency problem (Rubin, 1978; Brickley, et al., 1991).

3. Franchising and Agency

The agency problem arises because managers of branch offices, who are typicallypaid a fixed salary independent of unit performance (a low-powered incentive), have

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014

Understanding Denominational Structures 325

the incentive to shirk. The franchise system mitigates the agency problem byoffering a high-powered incentive to franchisees by tying their compensationdirectly to their performance.

But the actions of the franchisor are also subject to moral hazard. Franchisors,for their part, are expected to provide managerial support and monitor thestandards of operation throughout the franchise system. Monitoring standards ofoperation throughout the franchise system is critical because of the free riderimplications. Any one franchisee has the incentive to shave quality to improve theirprofit situation, knowing that the overall reputation of the franchise is more criticalthan that of any one franchisee. But a decrease in quality at any one franchiseereflects on all the others, who bear part of the costs. When a number of franchiseesfree ride, the entire system’s reputation is damaged.

Franchises mitigate the double moral hazard problem through a royalty ratebased on franchisee revenues and by allowing the franchisee (the agent) to keep anyresidual profits after the franchise fees have been paid. The profits will depend to alarge degree on the amount and quality of the franchisee’s effort. Also, to the extentthat the franchisor’s fee is tied to the success of the franchisee, the former is morelikely to address issues of observability and monitor the performance of the latter.The lower the royalty rate, the more incentive the franchisee has. The higher theroyalty rate, the greater is the franchisor’s incentive.

4. Churches as Franchises

Christian churches in the United States exhibit a variety of organizational forms,determined to a large degree by their ecclesiology and polity. Douglas Allen (1995)was among the first economists to make the connection between church teachingsand organizational form. Following the lead of most observers, he constructed atypology of theologies based on the freedom that church members have to holddifferent theological opinions. He identified three broad classifications based onchurch doctrine:

(1) Individualistic Churches – recognize the Bible as the word of God, but allowindividuals the freedom to interpret individual passages. An example is theSouthern Baptist Convention.

(2) Confessional Churches – the Bible is the sole source of authority, but thedenomination, not the individual, is responsible for interpreting specificpassages. Examples include the Presbyterian Church, the United MethodistChurch, the Evangelical Lutheran Church of America, and the EpiscopalChurch.

(3) Prophetic Churches – the Bible is only one source of authority. They also relyheavily on tradition and an earthly representative of God, who serves as aninterpreter of church doctrine. Examples are the Mormon Church and theRoman Catholic Church (Allen, 1995: 116).

Allen also constructed a typology of denominational organizational structure, basedon the ability of the clergy to control wealth transfers. He identified three categoriesof church organization:

(1) Congregational Churches – virtually all decisions are made at the congrega-tional level, either by direct or representative democratic processes. All rights,

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014

326 C. Zech

power, and responsibilities derive from the congregation. The denomination isjust a loose confederation of congregations, with limited and often ill-definedauthority. An example would be the Southern Baptist Convention.

(2) Hierarchical Churches – authority flows from the highest officers down to themembers. Congregation members have no direct say in church doctrine or inother church matters. Examples include the Mormon Church and the RomanCatholic Church.

(3) Denominational Churches – these churches fall between the congregational andhierarchical churches, with authority flowing out from the middle level, whichconsists of both elected clergy and lay representatives. Examples would includethe Presbyterian Church, the United Methodist Church, the EvangelicalLutheran Church of America, and the Episcopal Church (Allen, 1995:116–7).

From an organizational perspective, it follows that the most hierarchical churches,such as the Catholic Church, would operate its congregations with tight controls,akin to a vertically integrated branch office or perhaps an owner-operated franchise.At the other extreme are non-denominational churches, including many of the so-called mega-churches, who operate essentially like free-standing entrepreneurialorganizations. In between are Protestant denominations, which take on the featuresof franchises. Confessional churches take the form of business-format franchises,while individualistic churches are closer to trademark franchises. This should beviewed as a continuum, not a sharp demarcation.

The most interesting case is the business format franchise. Many mainlineProtestant churches in the United States exhibit the characteristics of businessformat franchises. A denomination (the franchisor) has many affiliated congrega-tions (franchisees). Congregations are not mere branch offices of the denomina-tions, and have varying degrees of independence, depending on the denomination.At the same time, they are not freestanding entrepreneurial enterprises. The generalcharacteristics of franchises follow.

(1) The franchisee receives exclusive rights to the franchisor’s trademark oroperating procedures, or the rights to sell a particular product. Congregationsadopt the brand name or trademark of the denomination, which stands for aparticular set of beliefs. People joining a congregation that is affiliated with theUnited Methodist Church, for example, would expect that church to hold acertain set of beliefs that would be different than, say, those held by a Catholicparish. In planting new congregations (i.e., awarding new franchises) denomi-nations typically are respectful of territorial rights.

(2) The franchisee receives support, through training, materials, co-op advertis-ing, or technical operating advice from the franchisor. Denominations offersupport to their congregations. They provide educational materials, hymnals,technical advice on issues such as stewardship and evangelization, andtraining for both ordained ministers and lay workers. They also coordinate theefforts of congregational activities in areas such as missionary work, whereeconomies of scale can result in more efficient use of congregationalresources.

(3) While the franchisor is able to achieve economies of scale in many of itsactivities (e.g., procurement, advertising, etc.) production is essentially a localactivity and requires an understanding of the local market. While the

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014

Understanding Denominational Structures 327

denomination is frequently able to achieve economies of scale in purchasingmaterials and supporting programs like missionary work, ultimately much ofthe ‘religion production’ occurs at the congregational level.

(4) The franchisor retains the right to monitor the franchisee for quality and otherrights related to the value of the trademark. This is critical, since the franchisoris aware that the entire organization’s reputation can be damaged by the failingsof just one franchise. Denominations retain the right to monitor the activities ofthe congregation to ensure that the trademark is not damaged. The amount ofmonitoring that occurs varies by denominational church doctrine and polity.Nevertheless, the denomination knows that its reputation depends on theactivities of each congregation, and has a vested interest in ensuring that eachcongregation faithfully represents the denomination’s doctrine.

(5) The franchisees are required to compensate the franchisor for the use of thetrademark and the on-going support. The compensation typically takes twoforms: an up-front, lump-sum fee and an on-going annual fee tied to thesuccess of the franchise. Congregations support their denominations finan-cially. Typically, this support is based on congregational membership, althoughin some instances it might be related to congregational revenues. In addition tothis ongoing financial support, many denominations require their congregationsto provide additional financial support for specific denominational programs,such as denominationally sponsored missionary work or disaster relief funds.

(6) Any residual profits or losses that the franchisee accumulates remains with thefranchisee. This serves to mitigate the moral hazard problem, since the profitsdepend at least in part on the quality of the franchisees’ efforts. Whilecongregations might show an excess of revenues over costs, their nonprofitstatus precludes them from distributing this excess. The residual for congrega-tions comes in the form of the ability to pursue their own goals or ministriesonce they have satisfied the denomination. For example, a particulardenomination might place a very high priority on increasing church member-ship through evangelization. One of its affiliated congregations might be moreinterested in outreach efforts such as ministering to the homeless. If thecongregation is able to satisfy the denomination with its evangelization efforts,it can use any residual resources (money or time) to pursue its own goals, suchas ministering to the homeless.

As with corporate franchises, denominational franchises run the risk of free riding.One congregation may ride the coattails of the others, not pulling its own weightwith respect to upholding church doctrine or generating resources. Likewise thedenomination could free ride on the congregations by neglecting to provideadequate on-going training or failing to monitor the efforts of othercongregations.

5. Individual Denominations1

While maintaining that there is a continuum of organizational structures runningfrom a branch office to a free-standing entrepreneurial operation, it is possible toidentify approximate positions on that continuum of current US religiousdenominations. It is interesting to note that two of the fastest growing USdenominations, the Roman Catholic Church and the Southern Baptist Convention,have widely divergent organizational structures.

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014

328 C. Zech

Roman Catholic Church

The Roman Catholic Church, one of the most hierarchical of all churches, isprobably most akin to a company-owned and operated business-format franchise.The characteristics that identify a Catholic parish as a business format franchiseinclude: the importance of the trademark to both the parish and the denomination,and the high degree of monitoring that takes place on the part of the denomination;the support offered by the denomination, including paying for the training of keyparish personnel (clergy) and offering training for other parish personnel; andcoordinating the efforts of parishes in such activities as missionary work andoutreach (e.g., Catholic Relief Services, the Bishops Overseas Appeal, etc.). Theparish pays an assessment (e.g., royalty) to the regional organization (diocese), butis allowed to keep any residual revenues. In siting parishes, care is taken to respectterritorial rights. The characteristics that distinguish a parish as company-ownedinclude the fact that in most states the parish is actually owned by the bishopthrough corporation sole. The key managerial personnel, the pastor and anyassociate priests or deacons, are appointed by the diocese. In addition, dioceses mayuse part of the assessment from financially successful parishes to support parishesthat are struggling financially. As with other hierarchical churches, decision-makingis centered with corporate officials (the Pope and bishops) and their staffs.Individual pastors have little input into church decision-making processes, and canbe heavily monitored for their implementation of church policies.

Southern Baptist Convention

In contrast to the Catholic Church, the Southern Baptist Convention most closelyresembles a trademark franchise. Virtually the only connection between thedenomination and an SBC congregation is in the use of the trademark name. SBCcongregations own their own property, plant their own congregations, and ordaintheir own ministers. The standards for ordination are established by eachcongregation. Clergy can only be disciplined by their congregation. Any royalty thatthe congregation pays to the denomination is voluntary. Because of the looseconnection between the denomination and the congregations, little or nomonitoring takes place, which can lead to opportunistic behavior. In fact, thedenomination has been troubled by conflicts between moderates and fundamen-talists over matters of church doctrine.

United Methodist Church

The organization of the United Methodist Church exhibits some similarities tothat of the Roman Catholic Church. Like the Catholic Church, the UMC exhibitsan episcopal structure. The local bishop owns the congregation’s property,approves the planting of new congregations, and appoints the ministers, who mustbe either ordained or licensed (paragraph 438 of the Book of Discipline). Ministersare monitored by the denomination and are expected to utilize materials approvedby the church (paragraph 216). The church sponsors its own publishing house.Even lay members may be disciplined for espousing doctrines contrary to theteachings of the church (paragraph 2621.3). Under Allen’s typology, the UMC isa Confessional Church, with the denomination’s interpretation of the bible thesource of its doctrine. However, the UMC exhibits significantly more monitoring

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014

Understanding Denominational Structures 329

of the denominational structures by the congregation than does the RomanCatholic Church through their involvement of the laity in Local ChurchAdministrative Boards and Councils, the Annual Conferences, and the GeneralConference. The General Conference, which includes both clergy and laity, isakin to a franchise advisory board with legislative as well as advisory capabilities.The ability of local church representatives to monitor denominational activitiesplaces the UMC closer to the non-company owned business format model offranchises.

The Episcopal Church

As part of the Anglican Communion (i.e., in communion with the See ofCanterbury), the Episcopal Church in the United States has an organizationalstructure similar to that of the Church of England and other worldwidemembers of the Anglican Communion, and in many respects, similar to that ofthe United Methodist Church. As in the UMC, Episcopalian bishops own thecongregational property and control the establishment of new congregations. Thedenomination ensures the consistency of congregational teaching by providing aCatechism. The denomination controls the ordination process by requiringbishops to regularly review candidates’ academic and personal qualifications(Title III, Canons 4–7 of the Episcopal Constitution and Canons). One significantdifference lies with the mechanics of the pastor appointment process. Ratherthan the bishop appointing the pastor, the Episcopal Church utilizes a ChurchDeployment Office, located in New York City. All Episcopal priests are encour-aged to update their file in this office on an annual basis. An Episcopal parishthat is in need of a pastor establishes a search committee. The committeecontacts the Deployment Office, which works with the committee to develop aparish profile. Based on this profile, the Deployment Office selects up to 100names for the parish to consider. The search committee conducts a winnowingprocess, including inviting the finalists to the parish for an interview. Once thecommittee has made its selection, it notifies the bishop, who almost alwaysapproves. The degree of independence that the congregation has in choosing itspastor makes it more independent than a UMC congregation. On the otherhand, like the Catholic Church and the UMC, the Episcopal Church retains theright to discipline its clergy (Title IV.1.1).

Evangelical Lutheran Church of America

ELCA congregations are in many respects more independent than are UMC orEpiscopalian congregations. For example, the congregation holds title to congrega-tional property. But ELCA congregations are required to assent to the authority ofthe scriptures, the catechism, and both the Apostles’ and Nicene Creeds. Theauthority of ordination resides with the synod bishop. ELCA bishops are involved inthe pastoral search process from the start, obtaining input from the congregation asto the type of leader that they want. After a period of discernment, the bishop sendsthe names of three candidates to the congregation, which interviews each of themand observes them preaching. The church council selects a candidate, who thenmust be approved by the entire congregation. Congregation members possess theability to monitor the denomination through their representation on the SynodAssembly.

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014

330 C. Zech

Presbyterian Church (USA)

The Presbyterian Church is much more congregational than are other MainlineProtestant churches. Congregations hold title to congregational property in trust.Since the church has no bishops, the calling of a pastor occurs solely at thediscretion of the congregation. In some ways the process is similar to that of theEpiscopalians. The Church maintains a call referral service, in Louisville, Kentucky.Ministers who are interested in moving submit a dossier, which contains theirestimates of their gifts and talents. The congregation’s pastoral nominatingcommittee interviews the candidates that are of most interest, even visiting thecandidates’ church to hear them preach. Once approved by both the nominatingcommittee and the congregation’s corporate elders, the entire congregation isallowed to vote. The church hierarchy plays virtually no role in the process.

Mega-Churches

Mega-churches are stand-alone congregations, often of large size, with nodenominational affiliation. Thus, in spite of their relatively large size, they lack theeconomies of scale to accomplish all that denominations can. At the same time, theydon’t experience the agency problems and transactions costs that are associatedwith denominations.

Based on the discussion presented in this section, it is possible to locate USdenominations along the organizational structure continuum found in Figure 1.

6. Specific Issues to be Addressed

The preceding discussion has argued that in many respects some denominations canbe viewed as franchise operations and analyzed using the franchise model. Likeother franchise organizations they are concerned with the problem of developingleadership and creating incentives for their management. They are concerned withstrategic issues to cope with the changing environment in which they operate. Theyalso must cope with more mundane concerns. But as nonprofit organizations, theirgoals are different and in many ways more complicated than franchises in theproprietary sector.

In this section, some common denominational issues are analyzed through theprism of the franchise model.

Church Growth

Issues of church growth can be analyzed through the franchise model. Churchesgrow by adding new members. Membership growth can occur because a particular

Figure 1. Church Organizational Structure Continuum.

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014

Understanding Denominational Structures 331

congregation has been successful in enticing local residents to join, or because thedenomination has been planting new churches. Just as a franchise’s growth istypically fueled by adding more units, rather than by the growth of any particularunit, so too, church growth may be fueled more by the planting of new churches,especially in areas experiencing population growth, rather than by efforts made tomake any one individual congregation more attractive to (the limited) local religiousmarket. (See Marler and Hadaway (1993) for a discussion of the issues surroundingthe relationship between the planting of new churches and church growth).

If the church is going to grow by recruiting new members from the local market,these new members are typically converts from other religions or from among theunchurched. In any event, church evangelization efforts are subject to ‘the problemof the commons’ (Hardin, 1968).

The problem of the commons as it relates to church growth refers to thetendency for churches to evangelize from the same (common) pool of prospectivemembers. Each church has the incentive to continue evangelizing among theprospective member pool so long as its marginal benefits exceed its marginalcosts. But the competition reduces the evangelization effectiveness of all of theother churches that are soliciting in the same donor pool, increasing theirmarginal costs. The analogy is the case of fishing vessels who all fish in the samewaters, resulting in over-fishing and a depletion of the supply of fish for otherfishermen. The problem is aggravated when many of the congregations who aresoliciting members are competing against other congregations from the samedenomination who are also soliciting the same potential member pool. Therefore,it is important that there exist some degree of central coordination of evangeliza-tion among churches to alleviate the problem of the commons in their churchgrowth efforts. One method that many denominations have employed is to grantaffiliate congregations exclusive territorial rights. The advantages of this approachinclude the fact that territorial restrictions are easy to administer and theiroutcomes tend to be predictable. Also, while restricting competition amongaffiliated congregations, it allows them to compete with other churches withoutcompeting against other affiliated congregations from the same denomination.The disadvantage of territorial restrictions is that they can be too rigid and offera disincentive for congregations to innovate.

A final church growth issue has to do with the fact that in recent decades, moreconservative Protestant churches, such as the Southern Baptist Convention, havebeen growing, while more liberal Protestant churches, such as the United MethodistChurch, have been declining in membership. Scholars have carried on anenthusiastic debate over the extent to which this pattern reflects the relativeattractiveness of each church’s message (Iannaccone, 1992; 1994). An alternativeexplanation lies with an understanding of each church’s organizational structure.Following Bradach’s (1998) comparison of company-owned units and independentfranchisees, we can observe that to the extent that a church is organized along thelines of a company owned franchise, decision-making, and the ability to respond tolocal conditions in order to make the church more attractive, are centered at thecorporate, or regional, level, not the local level. This makes it difficult for the localmanager (i.e., pastor) to style the congregation so it is appealing to local residents.Churches organized along a business format franchise model, or especially atrademark franchise model, grant pastors much more leeway in making theircongregations attractive to the local religious market in an effort to achieve churchgrowth.

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014

332 C. Zech

Inefficient Investment

Franchisees tend to under-invest in themselves, since the local operation bears all ofthe costs and the risks of the investment, but they fail to receive the full return totheir investment since the benefits may spillover to other franchisees. For example,a local franchisee would under-invest in any franchisee-specific advertising, sincethey would capture only part of the benefits.

So too, congregations tend to under-invest in themselves. For example, unlikethe Catholic Church, few Protestant congregations operate their own K-8 schools.It makes sense for a Catholic parish (a company-owned franchise) to operate aschool, since the costs and risk can be shared by the headquarters, even as the entirechurch shares in the benefits. Most Protestant congregations lack such assurances.While, for example, the entire Presbyterian Church might benefit from theestablishment of a local school by an individual congregation, that congregationtypically bears the full costs and risk by itself.

Royalty Rate

Most, but not all, denominations place an assessment (i.e., royalty rate) on theircongregations. Franchises use these funds to support their routine costs (rent,utilities, wages, etc.) and to carry out functions (advertising, training, monitoringfranchisees, etc.) that add value to the franchise name. Churches do the same. Thetrick lies in setting the appropriate royalty rate. A low rate provides incentive to thefranchisees that are able to keep more of the revenues as a residual. This mitigatesshirking on the part of the franchisees. A high royalty rate provides more incentiveto the franchisors, and diminishes their incentive to shirk.

This is an important issue to many congregation members, who are puzzled bythe fact that they are required to contribute to the denomination. They wonder whatthey are getting in return from the denomination (some congregation members referto the denomination as a ‘black hole’ or ‘bottomless pit’).

Among the factors that determine the most appropriate royalty rate are:

(1) The amount of training and advertising provided by the franchisor. The greaterthe amount of training and advertising, the higher the royalty rate. A highroyalty rate serves not only to compensate the franchisor for the expensesincurred in these activities, but also serves as a monitoring device (incentive) toperform these tasks well. Denominations that provide extensive services to theircongregations through providing them with materials and training would beexpected to charge higher royalty rates.

(2) The relative importance of the franchisor’s and franchisee’s contribution to thefranchises success (double-sided moral hazard). The more important is thefranchisee’s efforts to the success of the franchise (i.e., the greater the marginalproduct), the lower should be the royalty rate; the more important thecontribution (marginal product) made by the franchisor, the higher the rate.Churches with a strong denominational identity (trademark) and/or those thatprovide critical denominational support (e.g., training of clergy), such as theCatholic Church, would be expected to charge a high royalty rate, other thingsequal. Those with a weak denominational identity and/or insignificantdenominational support, such as the Southern Baptist Convention, wouldexperience a lower rate.

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014

Understanding Denominational Structures 333

(3) The number and dispersion of franchisees. A large number of widely disbursedfranchisees increases franchisor monitoring costs, and calls for a higher royaltyrate. A denomination that has a large number of widely scattered congregationswould be expected to impose a larger royalty rate.

(4) Asset specificity. Both the franchisor and the franchisee might be required tomake investments (commitments) that are less valuable outside the relation-ship, and thus are liable to be held up. For example, a denomination mightmake a commitment to a specific mission field, based on ex ante assurancesfrom the congregations that they will provide financial support for thosemissions. If the congregations later (ex post) change their minds and renege ontheir commitments, the denomination is stuck with the (moral) obligation tocontinue the missionary work. Or the denomination might require thecongregation to make ex ante physical changes to their facilities (e.g., providinga manse, positioning the altar) that are less valuable outside of that relationship.If the denomination then ex post reneges on its commitment, the congregationwill posses an asset of diminished value. To the extent that the denomination isconcerned about being held up by the congregation, it would impose a lowroyalty rate to ensure a continuing relationship. When the congregation isconcerned about holdup, it would be willing to pay a higher royalty rate.

Recruitment of Volunteers

Oster (1996: 89) has observed that an important consideration in choosing tovolunteer their time to an organization is the volunteers’ assessment of theirability to influence the composition and distribution of the organization’s output.There is a significant difference in the impact that a volunteer can have in abusiness format franchise, where significant decision-making authority is not inthe hands of local decision-makers (paid or volunteer) as opposed to a trademarkfranchise where there exists more local-level discretion. One would expect to findmore volunteer activity in a Southern Baptist congregation than in an Episco-palian congregation.

Support of Missionaries

One important role that churches play is that they support missionaries. In manychurches, mission support represents a separate assessment (royalty) from thestandard royalty. Missionary support can take on many forms. On the one hand, anindividual congregation could choose to support a missionary. Or, a number ofcongregations could choose to pool their resources and support mission activitythrough the denomination. Clearly, these two options present a tradeoff betweenefficiency (economies of scale) and agency (ability to monitor the use of funds).Individual congregational support of missions loses the benefits of economies ofscale, while preserving the ability to monitor the activities of the missionaries.Congregations who consolidate their mission funds through the denomination gainthe benefits of economies of scale while losing the ability to directly monitor missionaccomplishments. One would expect a trademark franchise congregation (whichlacks the ability to successfully monitor the denomination), such as the SouthernBaptists, to offer direct support to missionaries. A business format franchise, like theUnited Methodist Church, contains mechanisms (through lay involvement) tomonitor the missionary work of the denomination.

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014

334 C. Zech

A related issue is that of designated versus undesignated giving for mission work.Designated giving occurs when the donor decides which programs should befunded inside or outside the budget. Designated giving is also known as restrictedgiving and frequently is broken down into: special offerings at certain seasons of theyear; special giving to projects chosen by donors; and specified giving. The freedomto designate generates donor interest in projects but also creates competition amongprojects to appeal to donors rather than to serve recipients. By contrast,undesignated giving turns church money over to the national mission boards todecide priorities among mission projects. Centralization of funding permits long-term planning of mission strategies even when the importance of individual projectsmay not be evident to the donors. Long term planning is especially important inarranging incentives for missions. Among denominations that choose to pool theirmission funds, one would expect to find designated giving more popular wherethere are weak monitoring mechanisms in place, and undesignated giving morecommon where congregations feel they are in a stronger position to monitordenominational mission activities.

7. Summary and Conclusions

This article has attempted to contribute to the discussion of denominationalorganizational structure by modeling denominations as franchise operations. Indoing so, it is important to recognize that there are a variety of franchiserelationships, ranging from company-owned business format franchises to inde-pendent business format franchises to trademark franchises. These should be viewedas representing a continuum, not discrete structures.

The most compelling reason for modeling churches as franchises concerns theissue of double moral hazard. Denominations (franchisors) have the incentive tomonitor congregations to guard against moral hazard to protect their trademark(related to the teaching of their doctrine). Congregations (franchisees) have theincentive to free ride by cheating on quality (misrepresenting doctrine). Knowingthat it is the reputation of the denomination as a whole that is critical, acongregation may feel that it can benefit from that reputation at the same time ittries to achieve its own goals. But a decrease in quality at any one congregationreflects on all the others, who bear part of the costs.

But the actions of the denomination are also subject to moral hazard.Denominations are expected to provide managerial support and monitor thestandards of operation throughout the church. As indicated, monitoring thestandards of operation throughout the church is critical because of the free riderimplications. When a number of congregations free ride, the entire denomination’sreputation is damaged. Thus, it is in each congregation’s best interests to ensure thatthe denomination doesn’t shirk on its responsibility to monitor other congregations.

Modeling denominations as franchises has important practical implications.Many denominational-congregational issues (such as church growth issues, churchinvestments in facilities and human capital, church assessment rates, recruitment ofvolunteers, and mission funding) take on a new perspective when viewed throughthe prism of a franchise model.

Note

1. Many of the specifics of this section are drawn from Lipford (1992).

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014

References

Allen, Douglas W., “Order in the Church: A Property Rights Approach,” Journal of Economic Behavior andOrganization, June 1995, 27(1), pp. 97–117.

Bradach, Jeffrey L., Franchise Organizations. Boston: Harvard Business School Press, 1998.Brickley, James A., Dark, Frederick H. and Weisbach, Michael S., “An Agency Perspective on

Franchising,” Financial Management, Spring 1991, 20(1), pp. 401–20.Davidson, Audrey B., “The Medieval Monastery as a Franchise Monopolist,” Journal of Economic

Behavior and Organization, June 1995, 27(1), pp. 119–28.DiMaggio, Paul and Powell, Walter W., “The Iron Cage Revisited: Institutional Isomorphism and

Collective Rationality in Organizational Fields,” American Sociological Review, April 1983, 48(2), pp.147–60.

Dolin, Richard A., Slesnick, Frank, and Byrd, John T., “The Economics of Churches: A FranchiseApproach,” unpublished paper presented at the Midwest Economics Association Meetings, March1989.

Ekelund, Robert B., Jr., Hebert, Robert F. and Tollison, Robert D., “An Economic Model of theMedieval Church: Usury as a Form of Rent Seeking,” Journal of Law, Economics, and Organization, Fall1989, 5(2), pp. 307–31.

Hardin, Garrett, “The Tragedy of the Commons,” Science, September, 1968, 162, pp. 1243–48.Iannaccone, Laurence R., “Why Strict Churches are Strong,” American Journal of Sociology, March 1994,

99(5), pp. 1180–211.Iannaccone, Laurence R., “Sacrifice and Stigma: Reducing Free Riding in Cults, Communes, and Other

Collectives,” Journal of Political Economy, April 1992, 100(2), pp. 271–97.Lipford, Jody, “Organizational Reputation and Constitutional Constraints,” Constitutional Political

Economy, Fall 1992, 3(3), pp. 343–57.Marler, Penny Long and Hadaway, C. Kirk, “New Church Development and Denominational Growth

(1950–1988): Symptom or Cause?,” in David A. Roozen and C. Kirk Hadaway, eds, Church andDenominational Growth. Nashville, TN: Abingdon Press, 1993, pp. 47–86.

Oster, Sharon M., “Nonprofit Organizations and Their Local Affiliates: A Study in OrganizationalForms,” Journal of Economic Behavior and Organization, July 1996, 30(1), pp. 83–95.

Rubin, Paul H., “The Theory of the Firm and the Structure of the Franchise Contract,” Journal of Lawand Economics, April 1978, 21(1), pp. 223–33.

Dow

nloa

ded

by [

Uni

vers

ity o

f C

alif

orni

a Sa

nta

Cru

z] a

t 14:

38 1

5 O

ctob

er 2

014